Chapter 2

The law of _______ is illustrated by a downward-sloping curve.

demand

The number of buyers is a determinant of market ______.

demand

An increase in the number of buyers in a market is likely to _________ demand.

increase

An increase in the sales, property, or any other tax will ________ production costs and _______ supply.

increase; decrease

According to the Law of Demand, when all other things being equal, as price decreases, quantity demanded __________.

increases

The fundamental characteristic of demand, other things equal, is that as the price falls, the quantity demanded for a product ________.

increases

A normal good is an item for which demand ______ when income rises and ________ when income falls.

increases; decreases

The vast majority of goods are not related to one another and are called _________.

independent goods

Products that have decreased demand when consumer incomes rise and increased demand when consumer incomes fall are called _______ goods.

inferior

There is a(n) _________ relationship between the price of a good or service and the quantity demanded for that good or service.

inverse

The ________ is consistent with common sense because people ordinarily do buy more of a product at a lower price.

law of demand

A price ceiling is the maximum legal price a seller may charge for a product or service where a price at or below the ceiling is _________ and a price above the price ceiling is _________.

legal; illegal

A price at or above the price floor is _____; a price below it is _______.

legal;illegal

If the cost of production rises, the producer has an incentive to produce _____ output.

less

If the government subsidizes the production of a good, it in effect _______ the producers' costs and ______ supply.

lowers; increases

The added cost of producing one more unit of output is called ____________.

marginal cost

Diminishing _______ states that, in any specific time period, buyers will derive less satisfaction from each additional unit of the product consumed.

marginal utility

Name the Basic Determinants of Demand:

1. Consumers' tastes (preferences) 2. The number of buyers in the market 3. Consumers' incomes 4. The prices of related goods 5. Consumer expectations

Name the Determinants of Supply.

1. Resource Prices 2. Technology 3. Taxes and subsidies 4. Prices of Other Goods 5. Producer Expectations 6. The number of sellers in the market

________ in supply while holding demand constant results in an increase in equilibrium price, but a decrease in equilibrium quantity.

A decrease/A shift leftward

Which of the following scenarios describe the appropriate effects on equilibrium price and quantity due to a decrease in supply while holding everything else constant? A. A fishing tax is placed on all shrimp and the equilibrium price of shrimp increases while quantity decreases. B. An oil spill causes several fisherman to leave the shrimp business and the equilibrium price of shrimp increases while quantity decreases. C. An oil spill causes consumers to eat less shrimp and the equilibrium price of shrimp increases while quantity increases. D. An oil spill causes several fisherman to leave the shrimp business and the equilibrium price of shrimp increases while quantity increases.

A. A fishing tax is placed on all shrimp and the equilibrium price of shrimp increases while quantity decreases. B. An oil spill causes several fisherman to leave the shrimp business and the equilibrium price of shrimp increases while quantity decreases.

Which of the following are reasons for inverse relationship between price and quantity demanded? A. A lower price increases the purchasing power of a buyer's income, enabling a buyer to purchase more of a product. B. People ordinarily buy more of a product a low price than at a high price. C. Consumption is subject to diminishing marginal utility. D. A lower price represents a low quantity product. E. A higher price makes it more likely the consumer will substitute another good. F. Buyers will buy more of a good if their friends are buying it.

A. A lower price increases the purchasing power of a buyer's income, enabling a buyer to purchase more of a product. B. People ordinarily buy more of a product a low price than at a high price. C. Consumption is subject to diminishing marginal utility. E. A higher price makes it more likely the consumer will substitute another good.

Which o the following would result in a change in supply? A. An increase in the excise tax on cigarettes. B. An increase in the number of automobile drivers C. An increase or decrease in wages. D. An increase in the number of shoe stores at the local mall

A. An increase in the excise tax on cigarettes. C. An increase or decrease in wages. D. An increase in the number of shoe stores at the local mall

Which of the following decrease demand for any good or service? A. Falling incomes and the product is a normal good. B. A decrease in the price of a substitute good. C. Consumer expectations that either prices or income will rise in the future. D. An increase in the number of buyers. E. An unfavorable change in consumer tastes.

A. Falling incomes and the product is a normal good. B. A decrease in the price of a substitute good. E. An unfavorable change in consumer tastes.

Which of the following is a determinant of demand? A. Income B. Technology C. Resource Prices D. Producer expectations

A. Income

Which of the following illustrates the relationship between a good and its complement? A. When the price of tuition decreases, the demand for textbooks increases. B. When the price of lettuce increases, the demand for salad dressing decreases. C. When the price of Nike increases, the demand for Reeboks increases. D. When the price of hamburger decreases, the demand for hotdogs decreases.

A. When the price of tuition decreases, the demand for textbooks increases. B. When the price of lettuce increases, the demand for salad dressing decreases.

_________ efficiency refers to the particular mix of goods and services most highly valued by society assuming minimum-cost production.

Allocative

Which of the following refers to a particular apportionment or mix of goods services most highly valued by society?

Allocative efficiency

Which of the following recalls the meaning of a change in supply? A. A movement from one point to another on a fixed curve. B. A change in the schedule and a shift of the curve. C. A change in the price of a product and a movement along the curve.

B. A change in the schedule and a shift of the curve.

Which of the following decrease demand for any good or service? A. An increase in the number of buyers B. An unfavorable change in consumer tastes C. A decrease in the price of a substitute good D. Consumer expectations that either prices or income will rise in the future E. Falling incomes and the product is a normal good

B. An unfavorable change in consumer tastes C. A decrease in the price of a substitute good E. Falling incomes and the product is a normal good

In which of the following situations will quantity supplied exceed the quantity demanded? A. Below the market price B. In the imposition of a price floor C. In the imposition of a price ceiling D. Where there is an increase in demand while holding supply constant

B. In the imposition of a price floor

Other things equal, firms will produce and offer for sale ______ of their product at a high price than at a low price. A. The same B. More C. None D. Less

B. More

Choose all of the following that will cause a change in supply, not quantity supplied. A. Product price B. Number of Sellers C. Producer expectations D. Technology E. Consumer expectations

B. Number of Sellers C. Producer expectations D. Technology

Which of the following is the most important factor for a producer in determining how much of a product to produce? A. Quantity B. Price C. Revenue D. Cost

B. Price

Which of the following are determinants of supply? A. Price of Product B. Subsidies C. Complementary goods D. Growth in the number of buyers E. Taxes

B. Subsidies & E. Taxes

Why is consumption subject to diminishing marginal utility?

Because successive units of a particular product yield less and less marginal utility, consumers will buy additional units only if the price of those units is progressively reduced.

The effects on equilibrium price and quantity due to an increase in supply and a proportional and simultaneous increase in demand are shown by: A. An indeterminate change in equilibrium quantity and an increase in price. B. A decrease in equilibrium quantity and an indeterminate change in price. C. An increase in the equilibrium quantity and an indeterminate change in price. D. A decrease in the equilibrium quantity and an indeterminate change in price.

C. An increase in the equilibrium quantity and an indeterminate change in price.

Government-set prices cause: A. Environmental protection B. The elimination of tariffs and quotas C. Shortages D. Surpluses E. Negative side effects F. Distortion in resource allocation

C. Shortages D. Surpluses E. Negative side effects F. Distortion in resource allocation

What is the difference in price and cost?

Cost is not the same as price. Price is the price of a good or service, whereas the cost is the price of the resources used to produce a good. The difference between price and cost is a premium to the seller. The costs of resources affect supply and not quantity supplied.

_______ is simple a statement of a buyer's plans, or intentions, with respect to the purchase of a product.

Demand

The _______ of supply are any factors other than the product's _____ that have an effect on the supply of a good or service and cause the supply curve to shift.

Determinants; price

________ output is where quantity demanded and quantity supplied are equal in a competitive market.

Equilibrium

What happens to the equilibrium price and the equilibrium quantity if the supply stays constant and the demand decreases?

Equilibrium price falls and equilibrium quantity falls

What happens to the equilibrium price and the equilibrium quantity if the supply increases and the demand stays constant?

Equilibrium price falls and equilibrium quantity rises

What happens to the equilibrium price and the equilibrium quantity if the supply increases and the demand decreases?

Equilibrium price falls and the change in quantity is indeterminate

T/F: A complementary good is one that is used in place of another good.

FALSE. A complementary good is one that is used together with another good.

T/F: As more firms enter the industry, the supply curve shifts to the left.

False

T/F: Consumer expectations are a determinant of supply.

False

T/F: If demand for a good increases when consumer incomes rise, then the good is considered inferior.

False. Consumers demand less of an inferior good when incomes rise and more of them when incomes fall.

Define a subsidy.

Government financial assistance for the production of a good which lowers producers' costs and increases supply.

__________ resource prices raise production costs and, assuming a fixed product price, _____ profits.

Higher; reduce

____________ indicates that a lower price increases the purchasing power of a buyer's money income, enabling the buyer to purchase more of the product than before.

Income effect

___________ goods whose demand varies inversely with money income

Inferior goods

________ benefit is the additional utility gained from consuming one more unit of a good or service.

Marginal

What characteristics are present in the economy's most highly competitive markets?

Markets in which large numbers of independently acting buyers and sellers come together to buy and sell standardized products.

Define substitute good:

One that can be used in place of another good

Define complementary good:

One that is used together with another good

On a supply curve, _______ is labeled on the vertical axis.

Price

Which of the following has the greatest effect on the quantity supplied that producers are willing and able to supply?

Price

What two components does the supply curve illustrate the relationship between?

Price and quantity supplied

The production of a good or service in the least costly way is known as ________ efficiency.

Productive

_____________ suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive.

Substitution effect

A surplus is also known as an excess of ________.

Supply

Improvements in technology are a determinant of ________.

Supply

________ refers to the production of a product, whereas demand refers to the consumption of a product.

Supply

Substitution in production is a determinant of ______.

Supply--The higher prices of "other goods" may entice producers to switch production to hose other goods in order to increase profits.

What happens to the equilibrium price and the equilibrium quantity if the supply increases and the demand increases?

The change in equilibrium price is indeterminate and equilibrium quantity rises

What is productive efficiency?

The production of any particular good in the least costly way.

The inverse relationship between price and quantity demanded can be shown graphically by _________ sloping curve.

a downward

Why does a competitive market allocate society's resources efficiently to a particular product?

To keep costs down

T/F: Resource costs or changes in these costs to production are responsible for shifts in the supply curve.

True

T/F: The law of demand can be supported by the income effect.

True

T/F: The price of resources used in the production process help determine the cost of production incurred by firms.

True

T/F: In general, a firm will increase output of a good or service if the resource cost of the unit falls.

True. A decrease in resource costs will shift the supply curve to the right. Suppliers will increase the amounts they supply at each price.

A decrease in demand while holding supply constant results in _______ in both equilibrium price and quantity.

a decline

An increase in business taxes causes ________ in supply and will ________ production costs.

a decrease; increase

The supply curve is _________ sloping curve.

an upward

An economic unit, meaning a household, firm or government, should continue to engage in an activity as long as marginal ______ exceeds marginal _______.

benefit; cost

The ________ side of any market specifically refers to demand.

buyer

Markets bring together ______ and _______.

buyers ("demanders"); sellers ("suppliers")

A buyer's intentions or plans in regard to the purchase of a product is knowns as ________.

demand

Buyers and sellers are brought together in a __________.

competitive market

A decrease in supply and a simultaneous and proportional decrease in demand will result in a(n) __________ in equilibrium quantity, with no effect on equilibrium price.

decrease

A decrease in the number of buyers will probably _______ demand.

decrease

If a decrease in demand is greater than a decrease in supply, equilibrium price will _______.

decrease

An increase in supply while holding demand constant results in a(n) _______ in equilibrium prices, but a(n) ________ in equilibrium quantity.

decrease; increase

According to the Law of Demand, when all other things being equal, as price increases, quantity demanded __________.

decreases

A shortage results from an excess of quantity _______.

demanded

A demanded curve measures quantity ________ on the horizontal axis and ______ on the vertical axis.

demanded; price

The price where the intentions of buyers and seller match is called ________ or _________.

equilibrium price; market-clearing price

If an increase in supply is greater than an increase in demand, the equilibrium price will _________.

fall

A price ________ is a legally mandated price imposed above the price, otherwise known as equilibrium price, what would be established between buyers and sellers in a free market.

floor

Government may place legal limits on prices when it is determine ______ for buyers or unfairly _____ for sellers.

high; low

A surge in demand while holding supply constant results in a(n) ________ in both equilibrium price and quantity.

increase

An inverse relationship between two variables is a(n) __________ relationship.

negative

The demand curve is _________ sloping curve.

negative

Price and quantity demanded have a(n) ________ relationship.

negative/inverse/indirect

Price and quantity supplied have a(n) ________ relationship.

positive

A change in quantity demanded is caused by an increase or decrease in the _________ of the product under consideration and nothing else.

price

A change in quantity supplied is caused by an increase or decrease in the ________ of the product under consideration and nothing else.

price

The only factor that causes movement along the supply curve is:

price

A _______ is a minimum price fixed by the government.

price floor

The determinant of supply dealing with alternative products that can be produced by firms is called _______________.

price of substitutes in production

Competition among corn producers forces them to use the best technology and right mix of productive resources; otherwise their costs will be too high relative to the market price and they will be unprofitable. This is best described as _________ efficiency.

productive

The interaction between buyers and sellers determines the equilibrium price and the equilibrium ________.

quantity

A change in _______ refers to a movement along the demand curve in response to changes in the price of a good or service, whereas a change in ________ refers to a shift of the demand curve leftward or rightward in response to anything other than changes in the price of a good or service.

quantity demanded; demand

Demand Curve: The inverse relationship between price and quantity demanded for any product can be represented on a simple graph, in which, by convention, we measure ________ on the horizontal axis and ______ on the vertical axis.

quantity demanded; price

An increase in demand while holding supply constant _________ equilibrium price and _______ equilibrium quantity.

raises; raises

The price of ______ goods is a determinant of demand.

related

If the increase in demand is greater than the decrease in supply, the equilibrium quantity will _________.

rise

At the equilibrium price, quantity _____ equals quantity ______.

supplied; demanded

Market _________ is a schedule or curve showing the carious amounts of a product that producers are willing and able to make available for sale at each possible price during a specific period.

supply

Other things equal, the fundamental characteristic of the law of ______ is that as the price falls, the quantity supplied of a product falls.

supply

Producer expectations of future prices are a determinant of _________.

supply

If producers expect lower future prices for their goods or services, they will _______ now, illustrated as a shift in the supply curve to the _______.

supply more; right

When the number of sellers or producers in an industry increases, _______ of a particular good or service will ______. When the number of sellers in an industry ______, supply of a particular good or service will _____.

supply; rise; decreases; falls